What Is a Rights or Things Return and Should You File One in Canada?

Executors often hear about a separate return for amounts the deceased was owed but had not yet received, such as unpaid salary or vacation pay. This is called a rights or things return, and it is optional.

It can reduce the tax payable by the estate, but only for certain types of income and only if it is done correctly and on time. Here is what qualifies, how the deadline works and what to confirm with a lawyer or accountant.

This article covers Canadian federal tax law, which applies in every province.

What the return is

Under section 70(2) of the Income Tax Act, the value at death of rights or things that would be income when realized (other than capital property) is included in the deceased's income. The legal representative can instead elect to report them on a separate return, taxed as though the deceased were a separate person.

It is one of three optional T1 returns. The others are the return for a partner or proprietor, marked 150(4), and the return for income from a graduated rate estate, marked 104(23)(d). Optional returns are not required and may reduce or eliminate tax, but only for eligible income sources and time periods.

What qualifies

• Salary, commissions and vacation pay for a pay period that ended before death and was paid after.
• Retroactive salary adjustments.
• OAS and CPP/QPP for the month of death paid after death, and CPP and EI arrears.
• Uncashed matured bond coupons, bond interest earned but not received, and dividends declared before death but not received.
• Accounts receivable, supplies and inventory, but only if the business used the cash method.

Capital gains are not rights or things, and some retroactive contract settlements payable after death are excluded.

Deadline and how to file

The deadline is the later of one year after the date of death and 90 days after the Notice of Assessment or Reassessment for the final return was sent. Payment is generally due April 30, the same as the final return, though part may be deferred in some cases.

To file, use the T1 package for the year of death and the province of residence at death, and write 70(2) in the top right corner of page 1. Report only the eligible income there, not on the final return.

If you cannot pay all the tax right away, part of the tax on a rights or things return can be deferred with acceptable security and Form T2075, but interest still applies.

Where the tax saving comes from

The saving comes from claiming certain credits and deduction amounts again on the separate return. Credits on lines 30000 to 30450 and 30500 can be claimed in full on each return filed, not prorated for the year of death. The exception is that the personal amounts are prorated by days of Canadian residence divided by days in the year if the deceased was resident in Canada for only part of the year.

There is a limit. When splitting deductions and credits across the final and optional returns, the total of the claims cannot be more than what would have been allowed if only the final return were filed. The disability amount, for example, cannot exceed the allowable amount for the calendar year across all returns.

Whether the return is worthwhile depends on the size of the amounts and the deceased's other income, so an accountant can run the numbers.

Pitfalls and next steps

Be careful about distributing these amounts early. If rights or things are transferred or distributed to beneficiaries before the election period ends, section 70(2) does not apply to them, and the beneficiary instead includes the amount in income when received.

• List unpaid amounts owed to the deceased at death, such as final pay, vacation pay and uncashed items.
• Check each against the qualifying list, and exclude capital gains.
• Hold the items in the estate until the election period ends.
• Confirm your role with the CRA before accessing tax records.
• Mark the return 70(2) and keep the income off the final return.
• Diarize the deadline as the later of one year after the date of death and 90 days after the Notice of Assessment or Reassessment for the final return was sent.
• Ask a lawyer or accountant to compare the tax with and without the election.

Frequently asked questions